Delaware Court Ruling on Deal Conditions in the Apollo-Cooper Merger

A recent Delaware court ruling
deals with matters involving the “unraveling of the Agreement and Plan of
Merger (the “Merger Agreement”) by which a large Indian tire
manunfacturer—[Apollo]—was to buy a large American tire company—Cooper Tire
& Rubber Company (“Cooper”).” Billed as among the largest overseas
acquisitions by an Indian company, Apollo was to acquire all the shares of
Cooper. However, once the deal was announced, the share price of Apollo went
into a steep fall. More importantly, the deal received significant opposition
from Cooper’s affiliate in China, Chengshan Cooper Tires (“CCT”) and its
chairman as well as employees. In parallel, the deal also faced resistance from
Cooper’s own workers’ union in the US, United Steelworkers (“USW”).

Although both
Apollo and Cooper attempted for several months to address the concerns of CCT
as well as USW, they did not succeed, and the Merger Agreement was finally
terminated at the end of last year. Cooper’s efforts to seek specific
performance from the Delaware courts did not succeed.

In the current
round of litigation, Apollo requested the court for a declaration that “the
conditions to closing had not been satisfied prior to the trial of this action,
and Cooper [was], thus, not in a position to close the merger”. In order to
consider whether this declaratory relief can be granted, the Chancery Court in
Delaware examined the provisions of the Merger Agreement and specifically
whether Cooper had satisfied the conditions precedent to closing the merger. The
parties raised a number of issues, including whether a marketing period had
taken place (to enable Apollo’s financing banks to make the debt to finance the
merger), and whether several conditions precedent has been satisfied, such as
the lack of a material adverse effect (MAE), and Cooper’s compliance with
representations and warranties as well as covenants.

In its core
analysis, the court considered two principal aspects. First, it found that
during the period commencing the execution of the Merger Agreement, Cooper had
failed “to cause CCT—its largest subsidiary—to conduct business in the ordinary
course”. Hence, it had breached an important term of the Merger Agreement.
Second, it found that MAE had occurred, due to which Apollo had no obligation
to close the transaction. Hence, the court favoured Apollo and found that due
to the lack of satisfaction of the conditions precedent, it had not committed a
breach of the Merger Agreement, and was therefore entitled to the declaratory
relief it sought.

The Chancery
Court’s opinion is important as it sheds some light on the manner in which
merger documents are to be interpreted. For instance, even though the MAE
clause came with certain exceptions (such as the impact of the execution and
delivery of the Merger Agreement on employees and labour unions), the court
ruled that “it is axiomatic that contractual provisions must be read to make
sense of the whole. … In other words, the logical operation of the definition
of Material Adverse Effect shifts the risk of any carved-out event onto Apollo,unless that event prevents Cooper
from complying with its obligations under the Merger Agreement; the parties
agreed not to excuse Cooper for any such breach”.

Given the history
of this litigation, it is possible that an appeal may be preferred against this
decision. At the same time, the court’s opinion provides some guidance to
company that are engaged in negotiating such complex documentation in M&A
deals. While parties in India are becoming accustomed to drafting and
negotiating such documentation, they have almost never been tested before the
Indian courts. More importantly, it provides lessons for Indian companies
engaging in overseas acquisitions (particularly in the US) is structuring their
legal documentation carefully so as to ensure proper deal conditions and other
protective devices that might step in to save them in case of a dispute.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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